Evening Report | January 3, 2024

Evening Report
Evening Report
(Pro Farmer)

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FOMC minutes offer no clear timeline for expected rate cuts... Federal Reserve officials noted “upside risks” with inflation were diminished and there was growing concern about the damage “overly restrictive” monetary policy might do to the economy, according to minutes of the Dec. 12-13 policy meeting. While interest rate cuts are likely in 2024, officials provided little detail of when that might occur. “In discussing the policy outlook, participants viewed the policy rate as likely at or near its peak for this tightening cycle, though they noted that the actual policy path will depend on how the economy evolves,” the minutes stated. The minutes also noted an “unusually elevated degree of uncertainty” about the path of monetary policy.

Officials also addressed the Fed’s effort to reduce the bond holdings on its balance sheet. Several said it likely would be appropriate to wind down the process when bank reserves “are somewhat above the level judged consistent with ample.”

 

Polish farmers set to resume blockade at the Medyka border crossing with Ukraine... Polish farmers have expressed dissatisfaction with the lack of assurances their demands will be addressed. The farmers had temporarily suspended their protest on Dec. 24, seeking additional subsidies for corn and opposing proposed tax increases. However, Polish truck drivers have continued their blockades at several crossings along the Ukraine border. They are advocating for the reinstatement of the policy that requires Ukrainian companies to obtain permits to operate within the European Union. The situation at the border remains tense due to these ongoing protests and blockades.

 

Panama Canal addresses water shortages with short-term measures, ambitious long-term plan... The Panama Canal is facing water shortage challenges during the dry season, and long-term solutions are being explored, including damming the Indio River and drilling a tunnel, Bloomberg reports. The canal plays a vital role in global trade and is a significant source of revenue for Panama.

Short-term fixes:

  • During the dry season, the canal will release water from Lake Alajuela, a secondary reservoir, to allow for 24 vessels a day, which is lower than the pre-drought capacity of about 38 vessels.
  • If rains increase in May, there may be an opportunity to increase traffic through the canal.

Long-term solution:

  • The primary solution to chronic water shortages involves damming up the Indio River and drilling a tunnel through a mountain to pipe fresh water 8 kilometers (5 miles) into Lake Gatún, the main reservoir of the canal.
  • This project, along with additional conservation measures, is estimated to cost about $2 billion and will take at least six years to complete. A feasibility study by the U.S. Army Corps of Engineers is underway.

Importance of the Panama Canal:

  • The Panama Canal is a critical global trade route, handling approximately 3% of global maritime trade volumes and 46% of containers moving from Northeast Asia to the US East Coast.
  • It is Panama’s largest source of revenue, generating $4.3 billion in 2022.

Benefits of the Indio River reservoir:

  • The proposed Indio River reservoir would increase vessel traffic by 11 to 15 ships per day, helping maintain the canal’s capacity.
  • It would also ensure a fresh water supply for Panama City, which has experienced rapid development over the past two decades.

Challenges and opposition:

  • Moving the proposal forward will require congressional approval.
  • Thousands of farmers and ranchers whose lands would be flooded for the reservoir are already organizing to oppose the project.

 

Missouri bans foreign-owned ag land near critical military facilities... Missouri Gov. Mike Parson (R) issued an executive order banning businesses or individuals from nations designated as adversaries from purchasing farmland near military installations. “We are signing this order to safeguard our military and intelligence assets, prevent security threats to our state, and give Missourians greater peace of mind,” Parson said. The executive order specifically prohibits any citizen, resident or business from an adversarial nation from purchasing agricultural land within a 10-mile radius of critical military facilities in Missouri. Those countries include China, Cuba, Iran, North Korea, Russia and Venezuela. The order requires the Missouri Agriculture Department to approve any foreign acquisition of agricultural land in the state. It also requires certain information to be disclosed to the state before a foreign purchase. The order does not affect current landowners. Parson said the order will not impact foreign investment by U.S. allies like Israel, Sweden, Germany, the UK and Japan, among others.

 

Car manufacturers fear impact of scrapping incentives on U.S. EV sales... Carmakers are concerned about the potential negative impact on U.S. electric vehicle (EV) sales if the Inflation Reduction Act (IRA) is scrapped. Advisors of former President Donald Trump revealed plans to overhaul this key green legislation if he were re-elected. The IRA incentivizes consumers to buy EVs with certain parts sourced from the U.S. or its trading partners, discouraging the purchase of Chinese technology and attracting significant investment into the U.S. EV manufacturing sector. Without these incentives, the growth of EV sales is expected to slow, causing apprehension among industry executives.

General Motors’ CFO, Paul Jacobson, emphasized the IRA’s significant benefits for the EV market and expressed concerns about its potential discontinuation. Nissan’s CEO, Makoto Uchida, also credited the IRA for driving EV sales in the medium to long term.

As of 2023, EVs accounted for 9% of new vehicle sales in the U.S., with the Biden administration aiming for 50% by the end of the decade. However, EV growth rates are slowing in major markets, including the U.S. and Europe, due to consumer skepticism about higher prices and charging infrastructure.

If the IRA's provisions are struck down, Republican politicians may need to justify their actions to voters in states that have received significant IRA-related investments, raising questions about the potential impact on the U.S. auto industry.

 

U.S. debt hits record $34 trillion... The U.S. has entered the new year with a record national debt surpassing $34 trillion. The Treasury Department reported this development as Congress prepares for another potential battle over federal spending. Unless lawmakers can reach an agreement on a short-term continuing resolution or pass appropriations bills by Jan. 19 (and additional measures by Feb. 2), the U.S. faces the risk of its first federal shutdown since 2019.

The national debt is not only growing in total, but the cost of servicing this debt is also increasing rapidly. Interest payments on the federal debt have already reached $900 billion this fiscal year and are on track to exceed $1 trillion, a situation viewed as unsustainable. This escalating debt burden can also exacerbate inflationary pressures, posing challenges for the Federal Reserve, which primarily deals with monetary policy while having limited influence over fiscal matters. Oversized government spending has been a common practice across both political parties.

Credit rating agencies are taking note of these developments, with Moody’s recently revising its credit outlook for the U.S. to negative from stable, citing increased downside risks to the nation’s fiscal strength. Fitch downgraded America’s credit rating following last summer’s debt ceiling dispute, and S&P was the first to downgrade U.S. government debt in 2011. Continually postponing resolution of this issue makes it more challenging to address and may eventually lead to drastic measures rather than gradual adjustments, such as reduced spending or increased taxes.

While there is no specific threshold at which a government’s debt begins to harm its economy, the U.S. has managed a much larger debt load than previously thought possible. Nevertheless, extreme partisan divides have both parties blaming each other, with Republicans pointing to extensive federal spending programs under the Biden administration, such as the Infrastructure Investment and Jobs Act, the CHIPS and Science Act and the Inflation Reduction Act. Democrats refer to the “trillions spent on Republican tax cuts benefiting the wealthy and large corporations.”

 

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